Saturday, January 31, 2009

I'm glad the House Republicans voted unanimously against Obama's spending bill, but still, I'm slightly embarrassed to be agreeing with them. After the last eight years of government expansion, the Republicans are rightly perceived as hypocrites, which discredits anything they say about reducing government power, spending, borrowing, etc. Their opposition looks like pure politics (not to mention protection of their wing of the corporate state), enabling economist Brad DeLong to dismiss even academic economists who oppose the bogus stimulus spending as "ethics-free Republican hacks."

As I've said before, the Republican Party is a massive negative externality for the radical free-market movement.

Tuesday, January 27, 2009

Missiles fired from suspected US drones killed at least 15 people inside Pakistan today, the first such strikes since Barack Obama became president and a clear sign that the controversial military policy begun by George W Bush has not changed.

Security officials said the strikes, which saw up to five missiles slam into houses in separate villages, killed seven "foreigners" -- a term that usually means al-Qaeda -- but locals also said that three children lost their lives.

[T]here is no way for government macroeconomic policy to correct an incorrect perception of how [savings/consumption] plans have changed. There is no way for government to acquire the knowledge necessary to be able to coordinate individual plans. Such information simply does not exist. If it is going to ever exist it will be generated by the market process as the results of plan changes and the individual responses they provoke unfold. Any attempt by government to manipulate things will almost certainly make them worse because it is based on woefully incomplete information. It is not that the market prevents any disappointment or even crises. The market is not Utopia. The market works through feedbacks from mistakes as well as feedback from successes. it is just that the market is the best mechanism we have for resolving conflicting or miscommunicated plans. Keynes asked the right questions, but he gave the wrong answers and in the process sent economics off on a very costly detour.

I've neglected to note--and praise--the publication of Against Intellectual Monopoly, a multidisciplinary case against patents and copyrights by Michele Boldrin and David K. Levine, two pro-market, pro-property economists. If you are interested in the subject, this is the book to read.

Make sure, also, to read their recent Freeman article, co-written with Alessandro Nuvolari, on how the steam-engine patents delayed rather than encouraged innovation.

Even if government spending in theory could “stimulate the economy” in a genuine, sustainable way, it would not follow that politicians and bureaucrats would know how to spend the money intelligently. The pressures to do something now and the perverse incentives facing those in charge of the money guarantee there would be more doggle than boon.

Tuesday, January 20, 2009

Paul Krugman is said to have beat up on George Will during this joint appearance on ABC's "This Week" back in November. But all Krugman really did was show that he, like Keynes, holds an unrealistic Play-Doh model of capital, as opposed to the heterogeneous, multistage, intertemporal structure-of-production model of the Austrian school. When Will notes that there was negative net investment during the 1930s, Krugman responds that, of course, there was negative net investment: "Because when . . . all the factories are standing idle, who wants to build a new one?"

Point for Krugman? Wrong.

If Krugman took the Mises-Hayek trade cycle theory seriously he'd realize that the idle factories in the 1930s represented malinvestment induced by Federal Reserve credit expansion in the 1920s. This policy, by lowering the interest rate and falsely signaling an increase in real saving (i.e., a preference for future over present goods), shifted resources from later stages of production (closer to the consumer) to earlier stages of production. Unfortunately, those who think of capital as a heap of homogeneous, monochrome Play-Doh aren't sensitive to this point. Capital is capital is capital. That's why Krugman can't understand why someone would want to invest when factories stand idle.

When the inflationary boom ended, as it had to because it was artificially induced and there weren't enough resources for both the early stages and the later stages (where consumers wanted them), the malinvestments had to be liquidated. But since capital consists not of Play-Doh but of discrete things -- buildings, machinery, tools materials -- with particular characteristics, those that were the products of malivestment were not necessarily suitable for other purposes. They couldn't simply, costlessly, and instantly be moved and employed in later stages of production. Hence, the idle factories. This was wasted capital brought about by the credit expansion. This was the depression.

If the economy was to recover, new investment consistent with consumers' actual preferences had to be undertaken. But that required time and saving, i.e., deferred consumption. It also required a stable political environment in which investors could be confident that their property was safe from the government. Unfortunately, thanks to tax increases, unending interventionist programs, and threatening antibusiness rhetoric, FDR's government failed to provide that environment.

Krugman's flip remark to Will is a perfect illustration of what is wrong with Keynesian economics.

The news media are saturated with paeans to the peaceful transition of presidential power that takes place today. Aside from the fact that this is a preoccupation with the superficial (see below), it is also an awfully low setting for the bar. So the great American achievement is that no one will be killed or jailed as power passes from Bush to Obama? Amazing! But last I checked, peaceful transitions have been occurring for years in Canada, Australia, Britain, France, Germany, Japan, and a long list of other places.

At the risk of raining on the parade, I suggest that the inaugural festivities are not what they appear. Barack Obama says the pomp and circumstance are not about him but are a celebration of democracy. “For the forty-third time, we will execute the peaceful transfer of power from one president to the next,” he said.

He’s right, but not quite as he meant it. The peaceful transition from the Bush to the Obama regime is indeed the occasion, but let’s focus on exactly what is being transferred. Despite the oratory about hope, change, and renewal, government — as someone, perhaps George Washington, said — “is not reason; it is not eloquence; it is force.” If that is right — and I contend it is — then in the inauguration we have the irony of a peaceful transfer of something that is anything but peaceful: the legal power to use physical force.

Saturday, January 17, 2009

It is clear that Barack Obama will not be making any essential changes to U.S. Middle East policy, particularly when it comes to the Israeli government's abominable treatment of the Palestinians. (And watch for an intensification of the Afghan quagmire.) There may be some conciliatory rhetoric, but it will mean nothing. We've heard it before. Every incoming administration does the same thing. Nothing will change. Politics, undergirded by economic special interest, will assure that. As a result, the Israeli government will regularly substitute open warfare for beneath-the-radar oppression, as it has lately. The ratio of Palestinian to Israel casualties will remain huge, but the media will lead Americans to believe the Israelis are the primary victims. Americans will also be shielded from the fact that behind the violent outbursts lies the routine dehumanizing treatment of the Palestinians in the Gaza Strip. (In that connection, see this and this.)

Ask yourself: can you consume your way to prosperity? Of course not. So how can a society do so? Greater consumption is the effect not the cause of economic growth, yet this is so contrary to conventional wisdom that you can read newspapers and watch news programs for months without seeing this truth expressed.

To say the recession was caused by diminished demand is to say that the recession was caused by the recession. The fact is, people are holding on to their cash because the economy is in recession and they are uncertain about the future. As we’ll see, it is exactly under these circumstances that people should be saving.

Friday, January 16, 2009

Leonard Read’s classic essay, "I, Pencil," which is now 50 years old, is justly celebrated as the best short introduction to the division of labor and undesigned order ever written. Read saw an "extraordinary miracle … [in the] the configuration of creative human energies—millions of tiny know-hows configurating naturally and spontaneously in response to human necessity and desire and in the absence of any human master-minding!" His subject and its relation to freedom and prosperity were certainly worth capturing in such a clever, pleasing, and illuminating essay, which is why it is one of the best-known works in the popular free-market literature. But there’s another lesson in "I, Pencil" that has been largely overlooked, perhaps by Read himself. "I, Pencil" is also an excellent primer in the Austrian approach to capital theory. It’s worth looking at Read’s essay in that light.

Sunday, January 11, 2009

The money sluices are about to open wide on Capitol Hill. With a new Congress convened and a new president about to take office, we are likely to see record-shattering government expenditures. All inhibitions about deficit spending, as weak as they have been in recent years, are now dissolved. The motto among those in control is: Spend now!

Why? To “stimulate the economy.” Well, that’s a lousy reason. The economy doesn’t need stimulation. It needs freedom. More precisely, we need freedom — to pursue our ends through production and trade unmolested by know-nothing politicians in Washington and the 50 state capitals.

Israel and Hamas may currently be locked in deadly combat, but, according to several current and former U.S. intelligence officials, beginning in the late 1970s, Tel Aviv gave direct and indirect financial aid to Hamas over a period of years.

Israel "aided Hamas directly -- the Israelis wanted to use it as a counterbalance to the PLO (Palestinian Liberation Organization)," said Tony Cordesman, Middle East analyst for the Center for Strategic Studies.

Israel's support for Hamas "was a direct attempt to divide and dilute support for a strong, secular PLO by using a competing religious alternative," said a former senior CIA official.

According to documents United Press International obtained from the Israel-based Institute for Counter Terrorism, Hamas evolved from cells of the Muslim Brotherhood, founded in Egypt in 1928. Islamic movements in Israel and Palestine were "weak and dormant" until after the 1967 Six Day War in which Israel scored a stunning victory over its Arab enemies.

After 1967, a great part of the success of the Hamas/Muslim Brotherhood was due to their activities among the refugees of the Gaza Strip. The cornerstone of the Islamic movements success was an impressive social, religious, educational and cultural infrastructure, called Da'wah, that worked to ease the hardship of large numbers of Palestinian refugees, confined to camps, and many who were living on the edge.

"Social influence grew into political influence," first in the Gaza Strip, then on the West Bank, said an administration official who spoke on condition of anonymity.

According to ICT papers, Hamas was legally registered in Israel in 1978 by Sheikh Ahmed Yassin, the movement's spiritual leader, as an Islamic Association by the name Al-Mujamma al Islami, which widened its base of supporters and sympathizers by religious propaganda and social work.

According to U.S. administration officials, funds for the movement came from the oil-producing states and directly and indirectly from Israel. The PLO was secular and leftist and promoted Palestinian nationalism. Hamas wanted to set up a transnational state under the rule of Islam, much like Khomeini's Iran.

What took Israeli leaders by surprise was the way the Islamic movements began to surge after the Iranian revolution, after armed resistance to Israel sprang up in southern Lebanon vis-a-vis the Hezbollah, backed by Iran, these sources said.

"Nothing provides the energy for imitation as much as success," commented one administration expert.

A further factor of Hamas' growth was the fact the PLO moved its base of operations to Beirut in the '80s, leaving the Islamic organization to grow in influence in the Occupied Territories "as the court of last resort," he said.

When the intifada began, Israeli leadership was surprised when Islamic groups began to surge in membership and strength. Hamas immediately grew in numbers and violence. The group had always embraced the doctrine of armed struggle, but the doctrine had not been practiced and Islamic groups had not been subjected to suppression the way groups like Fatah had been, according to U.S. government officials.

But with the triumph of the Khomeini revolution in Iran, with the birth of Iranian-backed Hezbollah terrorism in Lebanon, Hamas began to gain in strength in Gaza and then in the West Bank, relying on terror to resist the Israeli occupation.

Israel was certainly funding the group at that time. One U.S. intelligence source who asked not to be named said that not only was Hamas being funded as a "counterweight" to the PLO, Israeli aid had another purpose: "To help identify and channel towards Israeli agents Hamas members who were dangerous terrorists."

In addition, by infiltrating Hamas, Israeli informers could only listen to debates on policy and identify Hamas members who "were dangerous hard-liners," the official said.

In the end, as Hamas set up a very comprehensive counterintelligence system, many collaborators with Israel were weeded out and shot. Violent acts of terrorism became the central tenet, and Hamas, unlike the PLO, was unwilling to compromise in any way with Israel, refusing to acquiesce in its very existence.

But even then, some in Israel saw some benefits to be had in trying to continue to give Hamas support: "The thinking on the part of some of the right-wing Israeli establishment was that Hamas and the others, if they gained control, would refuse to have any part of the peace process and would torpedo any agreements put in place," said a U.S. government official who asked not to be named.

"Israel would still be the only democracy in the region for the United States to deal with," he said.

All of which disgusts some former U.S. intelligence officials.

"The thing wrong with so many Israeli operations is that they try to be too sexy," said former CIA official Vincent Cannestraro.

According to former State Department counter-terrorism official Larry Johnson, "the Israelis are their own worst enemies when it comes to fighting terrorism."

"The Israelis are like a guy who sets fire to his hair and then tries to put it out by hitting it with a hammer."

"They do more to incite and sustain terrorism than curb it," he said.

Aid to Hamas may have looked clever, "but it was hardly designed to help smooth the waters," he said. "An operation like that gives weight to President George Bush's remark about there being a crisis in education."

Cordesman said that a similar attempt by Egyptian intelligence to fund Egypt's fundamentalists had also come to grief because of "misreading of the complexities."

An Israeli defense official was asked if Israel had given aid to Hamas said, "I am not able to answer that question. I was in Lebanon commanding a unit at the time, besides it is not my field of interest."

Asked to confirm a report by U.S. officials that Brig. Gen. Yithaq Segev, the military governor of Gaza, had told U.S. officials he had helped fund "Islamic movements as a counterweight to the PLO and communists," the official said he could confirm only that he believed Segev had served back in 1986.

The Israeli Embassy press office referred UPI to its Web site when asked to comment.

The Federal Reserve has been pumping hundreds of billions of newly created dollars into “the economy.” Much of that money has been sent to Wall Street to bailout large, struggling firms. But that’s just the beginning. President-elect Obama says that since he needs to “stimulate the economy” we can look forward to trillion-dollar budget deficits for years to come. Even before the financial turmoil began, the deficit had approached $500 billion. (Not to worry, though–Obama says deficit spending will impose “fiscal discipline” in the future.) Of course, when the federal government spends more than it taxes, it has to get the extra money somewhere. Therein lies the treachery.

Monday, January 05, 2009

We are certainly used to the fallacious Keynesian "economics" that pours forth from most of Paul Krugman's New York Times columns. That's bad enough. But dishonesty too? What's the excuse for that? In a recent column called "Fifty Hebert Hoovers," Krugman expressed fear that the nation's governors would follow in the footsteps of Hoover, with devastating consequences for the economy. And what did Hoover do that has Krugman so concerned? He writes:

No modern American president would repeat the fiscal mistake of 1932, in which the federal government tried to balance its budget in the face of a severe recession....

But even as Washington tries to rescue the economy, the nation will be reeling from the actions of 50 Herbert Hoovers — state governors who are slashing spending in a time of recession.... [Emphasis added.]

Krugman here leads his readers to believe that Hoover tried to balance the budget by slashing spending. In fact, Hoover did not reduce spending. On the contrary, he increased it. If he aimed at balancing the budget, it was through tax increases not spending cuts. For example, the top marginal income-tax rate jumped from 24 to 63 percent. Anyway, he actually ran large budget deficits. In this, as in many other areas, Hoover anticipated Franklin Roosevelt. (See my article, "Bad Deal," in The American Conservative, Jan. 12.)

I spent much of my recent vacation reading Henry Hazlitt's chapter-by-chapter demolition of Keynes's The General Theory of Employment, Interest, and Money (1936), The Failure of the "New Economics" (1959). I didn't expect to read the book cover to cover, but after only a few pages I had to keep going. It is that well-written and interesting. I'm now a few pages from the end.

The more I read the more I thought: Keynes was surely joking. No one in his position could really be that confused, contradictory, and ignorant of economic logic. It had to be a gag on the economics profession, an emperor-with-no-clothes experiment.

Keynes was a brilliant man. Much of what he wrote he wrote in tongue-in-cheek, for the pleasure of paradox, to épater le bourgois [shock the middle class], in the spirit of Wilde, Shaw, and the Bloomsbury circle. Perhaps the whole of the General Theory was intended as a huge (400-page) joke, and Keynes was appalled to find disciples who took it all literally.

If it was a joke, Keynes helped inflict much misery and oppression on innocent people just for a laugh. I guess for the elitist Keynes, the well-being of the masses can't be allowed to impede his bold and daring lifestyle. It is for people like him that secularists like me wish there was a place of fire and brimstone.

At any rate, I highly recommend Hazlitt's book. Don Boudreaux says that Richard Dawkins's The Blind Watchmaker proves that any subject, no matter how complex, can be written about clearly and accessibly. I say the same about The Failure of the "New Economics."

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